Too Early To Call Bottom, But Things Are Looking Up

Right now, the talk around Seattle, where I live and work, is all about the long-awaited rise in home prices.

On a local, as well as national, basis there is clear evidence of home values rising so far this summer. Several data sources that look at national price levels are all showing roughly the same, but there was one that stuck out. Clear Capital published a report suggesting that sale prices were up by 1.7% across the U.S. during the second quarter, and that “the West led the regions in price recovery and forecasted growth.”

They even went as far as to suggest that the Seattle-Bellevue-Tacoma market should exhibit annual price growth of 14.4% by year’s end, and that this market ranked first out of all the metropolitan areas analyzed.

But before we start celebrating the long awaited return of the market, I want to add a few words of caution to this very rosy story.

The data that I am looking at does, indeed, show several regions that have seen an extraordinarily good second quarter, but there is also data that suggests that we should not get too excited too quickly – and it’s all about foreclosures.

Whilst it’s undoubtedly true that foreclosures brought home prices down initially, they actually then started driving them up due to rabid demand from both investors and first-time buyers who were looking for bargains. (This has certainly been the case here in Seattle where over 30% of all transactions in 2011 were all-cash, investor purchases.)

Supplies of these cheap homes have now started to dwindle as banks continue their efforts to modify many underwater loans. Additionally, states that require a judge in the foreclosure process are facing a huge backlog that is dramatically lowering — albeit temporarily — the number of distressed units for sale.

Additional scrutiny on how lenders and servicers process foreclosures, along with aggressive foreclosure prevention efforts by the federal government, and several state governments, continue to hobble the foreclosure market at a national level.

Combining these two things indicates that prices are now being driven higher by the sale of more expensive, non-distressed units.

“So it’s all good”, I hear you way.  Well hold on just a minute.

Overall foreclosure activity was down in the second quarter of this year, driven primarily by a drop in bank repossessions (REO’s). But according to RealtyTrak, 311,010 properties started the foreclosure process during second quarter, which represents a nine percent increase from the previous quarter and a six percent increase from the second quarter of 2011. This marks the first year-over-year increase in quarterly foreclosure starts since the fourth quarter of 2009.

It looks to me as if lenders are now, slowly but surely, catching up with the backlog of delinquent loans, which is why the average time to complete the foreclosure process started to level off, or decrease in some states, in the second quarter.

I believe that the increases in foreclosure starts in the first half of this year will likely translate into more short sales and bank repossessions in the second half of 2012 and into next year.

What does this mean? If we see a dramatic increase in distressed listings, in concert with a persistently low level of non-distressed homes coming to market, we are sure to lose the price gains that we have been seeing recently.

That said, I would add that not all markets are equal, and some will certainly do better than others, but I am afraid that it is still too early to call a bottom on the U.S. housing market just yet.